RISK ASSESSMENT

Growth driven by public investment

Growth (excluding the oil sector) is expected to continue to increase in 2019, driven by public investment. Originally, the Timorese economy was dependent on hydrocarbon production, which enabled it to build a large oil fund that was worth USD 16.9 billion in 2017, or 571% of GDP. However, reserves are running out, and output is expected to end in 2022 – although the development of the Greater Sunrise gas platform in partnership with Australia could push back this deadline. The economy has no other growth sectors, apart from agriculture (coffee production in particular), which accounts for 90% of total exports excluding oil. This was the justification for a government plan to invest heavily to diversify the economy: the Strategic Development Plan (2011/30) aims to improve the health system and the institutional framework, and to develop other sectors of activity (agriculture, tourism, petrochemistry) and infrastructure (telecommunications, energy, water supply and sanitation). In 2019, the government will begin the second phase of its investment plan, which includes USD 704 million (20% of GDP) for infrastructure construction, USD 25 million (1% of GDP) to develop eco-tourism, and USD 129 million (5% of GDP) for the continued construction of the new port in Timor Bay, which is being carried out as part of a PPP, with French company Bolloré putting up an additional USD 12 million. As a result, economic activity will be linked to public consumption and investment, which account for 60% of GDP. Private investment, meanwhile, is expected to remain low due to the weak domestic market and poor business environment. Private consumption (27% of GDP), driven by job creation in the construction sector, should increase in 2019, while inflation is set to accelerate on higher food and fuel prices.

Deficits widen on substantial public spending

The fiscal deficit is expected to widen as a result of higher government spending on strategic investment projects for economic diversification. Revenues come from the oil sector and are tending to decline with production. The main risk remains the wasteful funding of “white elephants”, such as the new port under construction. In the absence of fiscal consolidation, the deficit is expected to continue to be largely financed by the oil fund, which financed 90% of the deficit in 2017, and by external borrowing, increasing the external share of public debt (5% of GDP in 2017).

The current account deficit is also expected to widen due to a larger trade deficit, as coffee exports are volatile and weather-dependent, while fuel imports are set to increase. The chronic deficit in services should remain stable. The income surplus, which is where profits repatriated from oil investments are recorded, is expected to decline along with production, while remittances from expatriate workers should stay at the same level. The current account deficit is expected to be partly financed by FDI (1%).

Government restructuring and improved external relations

The July 2017 parliamentary elections put the Revolutionary Front for an Independent East Timor (Fretilin), led by Prime Minister Mari Alkatiri, ahead with a minority in parliament (23 seats out of 65). The Parliament, and in particular opposition parties including the National Congress for Timorese Reconstruction (CNRT), the Democratic Party (DP) and the Alliance for Change and Progress (AMP), twice rejected the government's political programme. As a result, President Francisco Guterres, a member of Fretilin, dissolved parliament. Fresh elections in May 2018 saw the appointment of a new Prime Minister, Taur Matan Ruak, from a coalition of the AMP, CNRT and the Popular Liberation Party (PLP), which has a majority in parliament (34 seats out of 65). The 2018 Budget Bill was finally passed in September and remains on track to increase public spending in order to diversify the economy. However, disagreements persist over the distribution of government spending, with some MPs arguing that the expenditures do not focus enough on agricultural development, when the sector employs the majority of the local population.

With regard to its external relations, Timor-Leste reached an agreement with Australia on the establishment of maritime borders in the Bay of Timor. The country felt that offshore fields were unfairly shared under the previous agreement. Discussions are ongoing on a collaboration between the two countries for the development of the Greater Sunrise gas platform, where Timor-Leste would recover 80% of the revenues if the gas and oil are refined in an Australian plant, or 70% of the revenues if the hydrocarbons are processed in a Timorese plant. This agreement would provide new opportunities for the Timorese economy and delay the forecast shortage of hydrocarbon reserves.